[Reference: FAR 31.205-19]
A. Insurance on Lives of Key Personnel
Costs of insurance on the lives of key personnel, such as officers, partners, or proprietors are allowable only to the extent that: (1) the insurance represents additional compensation, and (2) the amount paid is reasonable. However, if the company or its owners are beneficiaries, the costs are unallowable.
B. Professional Liability Insurance
Professional liability insurance (also referred to as errors and omissions insurance) protects against damages to clients or third parties resulting from professional errors or judgments. The cost of professional liability insurance is allowable, subject to tests of allocability and reasonableness.
Alternately, the costs incurred by an engineering consultant to correct its own defects, settle claims in lieu of correcting its own defects, or similar acts are unallowable costs as either a direct or an indirect charge, however represented. Simply changing the label to “warranty” or “settlement” does not render the costs allowable.
C. Losses and Insurance Deductibles
Per FAR 31.205-19(d)(3), actual losses are unallowable unless expressly provided for in the contract, except :
(i) Losses incurred under the nominal deductible provisions of purchased insurance, in keeping with sound business practice, are allowable; and
(ii) Minor losses, such as spoilage, breakage, and disappearance of small hand tools that occur in the ordinary course of business and that are not covered by insurance, are allowable.
D. Self Insurance
Engineering consultants may elect to provide coverage for certain risks from their own resources under a program of self-insurance. The engineering consultant’s decision to self-insure should be based on a determination that the coverage can be provided by self-insurance at a cost not greater than the cost of obtaining equivalent coverage from an insurance company or State fund. If purchased insurance is available, the charge for any self-insurance coverage plus insurance administrative expenses shall not exceed the cost of comparable purchased insurance plus associated insurance administrative expenses.
Generally, engineering consultants will rely on self-insurance to cover ordinary risks and losses and will maintain various forms of purchased insurance to cover major risks and catastrophic losses.
The self-insurance charge plus insurance administration expenses may be equal to, but must not exceed, the sum of comparable purchased insurance plus the associated insurance administration expenses. The engineering consultant’s actual loss experience shall be evaluated regularly and self-insurance charges for subsequent periods shall reflect such experience in a similar manner to purchased insurance.
As discussed in FAR 31.205-19(c)(2), the requirements of FAR 28.308 must be met. This requires self-insurance programs to be submitted for pre-approval when 50 percent or more of the self-self-insurance costs to be incurred at a segment will be allocated to negotiated Government contracts and the self-insurance costs at the segment are expected to be $200,000 or more annually.
8.16—Interest Costs
[Reference: FAR 31.205-20]
Interest on borrowings (however represented), bond discounts, costs of financing and refinancing capital (net worth plus long-term liabilities), legal and professional fees paid in connection with preparing prospectuses, and costs of preparing and issuing stock rights are unallowable (but see FAR 31.205-28).
However, interest assessed by State or local taxing authorities under the conditions specified in FAR 31.205-41(a)(3) is allowable.
8.17—Lobbying Costs
[Reference: FAR 31.205-22]
Lobbying and political activity costs are generally unallowable. Some examples of these types of costs are activities that attempt to influence the outcomes of Federal, State, or local elections, contribute to political parties or organizations, influence Federal, State, or local legislation, legislative liaison activities or influence employees of the executive branch of government.
Certain activities may be allowable if detailed records are maintained. They may include activities such as providing technical and factual presentation of information through testimony, statements or letters in response to a document request on topics directly related to contracts, or lobbying activities that may directly reduce contract cost.
8.18—Losses on Other Contracts
[Reference: FAR 31.205-23]
Any excess of costs over income under any other contract (including the engineering consultant’s contributed portion under cost-sharing contracts) is unallowable. This would include costs applicable to direct project labor and/or expenses not fully reimbursed due to contractual limitations.
8.19—Organization and Reorganization Costs
[References: FAR 31.205-6, FAR 31.205-27]
All costs incurred in connection with planning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitions or raising capital, are unallowable.
However, an exception to this appears in FAR 31.205-27(b); the cost of activities primarily intended to provide compensation (acquiring stock for executive bonuses, employee savings plans, and employee stock ownership plans), are not considered organizational costs, but instead are governed by
FAR 31.205-6.
8.20—Patent Costs
[Reference: FAR 31.205-30]
Patent costs not required by the Government contract are unallowable. Certain costs may be allowable if they are incurred as a requirement of a Government contract. They include costs such as preparing disclosures, filing documentation, searching records and counseling related to general patent matters.
8.21—Retainer Agreements
[Reference: FAR 31.205-33]
Work performed by professionals and engineering consultants with special skills are allowable but must be supported by detailed evidence of the nature and scope of the work performed.
Engineering consultants may engage outside professionals and consultants on a retainer-fee basis. FAR
31.205-33(e) requires that allowable retainer fees be supported by evidence that:
The services covered are necessary and customary,
The fee is reasonable in comparison with maintaining an in-house capability, and
The level of past services justifies the amount of the retainer fees.The supporting evidential matter requirements also apply to retainer agreements, except retainer agreements are not required to (and generally do not) have specific statements of work.
FAR 31.205-33(f) contains three specific documentation requirements that must be met for any professional and consultant service costs including those on retainer-fee basis to be allowable. These requirements are:
Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses if any) and details of actual services performed.
Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided.
Consultant work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.
8.22—Relocation Costs
[Reference: FAR 31.205-35]
Certain costs of relocating permanent employees are allowable if numerous requirements are met. For more details see FAR 31.205-35(a). Limitations for considering costs allowable include the following criteria, as set forth in FAR 31.205-35(b):
(1) The move must be for the benefit of the employer.
(2) Reimbursement must be in accordance with an established policy or practice that is consistently followed by the employer and is designed to motivate employees to relocate promptly and economically.
(3) The costs must not be otherwise unallowable under [FAR] Subpart 31.2.
(4) Amounts to be reimbursed shall not exceed the employee’s actual expenses, except as provided for in paragraphs (b)(5) and (b)(6) of this subsection.
(5) For miscellaneous costs of the type discussed in paragraph (a)(5) of this subsection, a lump-sum amount, not to exceed $5,000, may be allowed in lieu of actual costs.
(6) Reimbursement on a lump-sum basis may be allowed for any of the following relocation costs when adequately supported by data on the individual elements (e.g., transportation, lodging, and meals) comprising the build-up of the lump-sum amount to be paid based on the circumstances of the particular employee’s relocation:
(A) Costs of finding a new home, as discussed in paragraph (a)(2) of this subsection.
(B) Costs of travel to the new location, as discussed in paragraph (a)(1) of this subsection (but not costs for the transportation of household goods).
(C) Costs of temporary lodging, as discussed in paragraph (a)(2) of this subsection.
When reimbursement on a lump-sum basis is used, any adjustments to reflect actual costs are unallowable.
The following types of relocation costs are unallowable:
(1) Loss on the sale of a home.
(2) Costs incident to acquiring a home in the new location as follows:
(i) Real estate brokers’ fees and commissions.
(ii) Costs of litigation.
(iii) Real and personal property insurance against damage or loss of property.
(iv) Mortgage life insurance.
(v) Owner’s title policy insurance when such insurance was not previously carried by the employee on the old residence. (However, the cost of a mortgage title policy is allowable.) (vi) Property taxes and operating or maintenance costs.
(3) Continuing mortgage principal payments on a residence being sold.
(4) Costs incident to furnishing equity or nonequity loans to employees or making arrangements with lenders for employees to obtain lower-than-market rate mortgage loans.
Some examples of the conditions which would cause the costs to be unallowable include the following:
The claimed costs include mortgage-related costs, and the employees were not homeowners prior to the move.
The move is for a period less than 12 months.
The move does not benefit the employer.
The employer does not have a consistent relocation policy for all employees.
The claimed costs include a loss on the sale of a home.
The claimed costs represent continuing mortgage principal payments on a sold residence.
8.23—Rent/Lease
[Reference: FAR 31.205-36]
An operating lease is the most common type of agreement used to lease realty or personal property.
Under an operating lease, the engineering consultant pays rent to a third party at prevailing market rates.
Operating lease payments generally are allowable in full, provided that the leased assets are allocable to, and used in, the engineering consultant’s primary business activities. By contrast, special consideration is required for arrangements that are either structured as capital leases (a.k.a. “financing leases”) or involve common control.